Why Apple’s New iPhone Upgrade Plan Is Driving Growth

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HBR STAFF

You have to hand it to Apple. What other company incites such a frenzy when it releases an updated version of its product? The recent iPhone 6S release went as expected: winding lines of eager consumers at Apple stores and fevered media coverage. Apple announced over 13 million units were sold during that first weekend. While strong reviews fueled consumer interest, credit should also be given to Apple’s new iPhone Upgrade Purchase Plan. This pricing plan provided another purchase option to consumers and, just as importantly, made Apple more of a rival to the cellular carriers that sell its smartphones.

Apple’s iPhone Upgrade Purchase Plan combines the retail prices of both a selected iPhone 6S and its AppleCare+ enhanced warranty – then divides this total amount into 24 equal monthly payments, with no interest added on. After the 24 payment commitment is fulfilled, the purchaser owns the phone. However, after 12 months of payments, the buyer has the option to upgrade to a new phone. Doing so resets the agreement clock, meaning the buyer is on the hook for 24 more payments. Plus, the phone is unlocked, meaning purchasers can select whichever cellular carrier is the cheapest and switch at any time.

Why did Apple offer this new pricing plan? The multinational technology company suffers from what I call a “curse of awesomeness” – it’s under tremendous pressure to continue breaking sales figures. For the first few iPhone generations, first weekend sales of 1 million units were the norm. These closely watched “opening weekend” sales jumped to 4 million in 2011 and climbed to 10 million last year. If this weekend’s sales hadn’t handily beat last year’s 10 million marker, the new iPhone would have likely been deemed a failure. Apple understands new pricing plans can generate growth – in this case, by promoting more frequent upgrades. (And just for the record, I do own some Apple stock.)

There’s a strategy here that other companies can learn from. Every manager needs to realize their company’s “pricing strategy” is composed of two key components: the actual price and how customers pay. First is the decision around the price tag: Should it be $74.99 or $80? But just as important are the types of pricing plans or how customers pay. A new pricing plan can activate dormant customers – those who are interested in purchasing but haven’t because the way to pay isn’t attractive to them.

For example, a colleague recently was choosing between two dentists to perform expensive dental work. She went with the one that offered a payment plan. In a similar vein, a friend takes his family to all-inclusive resorts because, as he tells me, “Rafi, it’d kill me to see my kids drinking $5 sodas on the beach all day.” In both instances, price wasn’t the key issue; instead the plan – how customers pay – is what made the sale.

The iPhone Upgrade Purchase Plan provides a seamless opportunity to frequently upgrade. Intrigued by the latest model? Pick it up at the Apple Store and the monthly payment – which is already incorporated into your budget – doesn’t change. It’s like getting the latest technology for “free.” Leasing has transformed the luxury automobile market in a similar way, by making high-end cars more affordable for a wider swath of consumers, and the shift to a lease-like pricing plan for Apple’s smart phones is already having a dramatic effect.

It’s fair to ask, since many cellphone carriers also offer plans that encourage upgrades, why does Apple need its own plan?

Better monetizes customers. As the number one most respected and admired company in the world, many customers prefer dealing directly with and shopping at Apple. Strengthening customer relationships provides opportunities to promote other products. In addition, the simplicity of Apple’s upgrade plan is attractive. AT&T, for example, has four different early upgrade options. Bundling AppleCare into the plan also boosts sales of this extended warranty product.

Boxes in wireless carriers. Apple desperately needs cellular providers to encourage frequent iPhone upgrades. By rolling out its own upgrade plan, Apple is putting carriers on notice that if they don’t continue offering similar plans, they’ll lose customers.

Promotes competition amongst wireless carriers. By providing a new buying alternative to customers, wireless companies were strong-armed to provide attractive iPhone deals. Last week, for instance, Verizon – which hadn’t offered an early upgrade option – announced a new plan that allows customers to upgrade iPhones annually. Feeling the heat, T-Mobile and Sprint dueled with discounts, touting opportunities to lease a new iPhone for as low as $5 and $1 per month respectively. Increased sales brought about from this intense competition alone makes the Upgrade Purchase Plan a big success.

Every company isn’t like Apple. But every manager can learn from Apple’s success. Pricing is far more creative than a rudimentary two lever “up or down” strategy. As Apple has shown, new pricing plans can generate substantial growth.

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